7.4 Settlement, Closing Statements, and Prorations

Debits and credits

A settlement (closing) statement reconciles what each party owes and is owed.

• A debit is a charge against a party (money they must bring or that reduces their proceeds).
• A credit is an amount in favor of a party (money they receive or that reduces what they owe).

The sales price is the master entry: a debit to the buyer because they must pay it, and a credit to the seller because they receive it. The same dollar event hits both statements from opposite directions. To find cash the buyer needs at closing, total the buyer's debits and subtract the buyer's credits. To find the seller's net proceeds, total the seller's credits and subtract the seller's debits. The statement must balance for each party, and the settlement agent (often a title or escrow company) prepares it and disburses funds only once everything reconciles.

Who gets debited or credited

Single-entry vs. double-entry: the sales price and prorations are double-entry — they appear on both parties' sides because one party's debit is the other's credit. A buyer-only cost such as the new loan's prepaid interest, or a seller-only cost such as the existing loan payoff and the commission, is single-entry and appears on just one statement. Recording fees and transfer taxes are assigned by contract or local custom, so the question will tell you who pays. When in doubt, ask: does this dollar move between the two parties (double-entry) or to an outside third party (single-entry)?

Prorations — the core math

Prorations split recurring costs between the parties based on who owns the property each day. Many exams use a statutory (banker's) year of 360 days = 12 months of 30 days; others use the actual 365-day calendar. Read the question.

General approach:

1. Find the annual (or monthly) amount.
2. Find the per-day rate (÷360 or ÷365, or monthly ÷30).
3. Count the number of days charged to each party (usually the seller owns the day of closing unless stated otherwise).
4. Assign the credit/debit by whether the item was prepaid or in arrears.

Worked example — property tax proration (taxes in arrears)

Annual taxes = $3,600, unpaid, covering the calendar year. Closing is April 30. Use a 360-day year (30-day months). The seller owned Jan–Apr (4 months = 120 days).

1. Daily rate = $3,600 ÷ 360 = $10/day.
2. Seller's share = 120 days × $10 = $1,200.

Because the taxes are unpaid (in arrears) and the buyer will pay the full bill later, the seller owes their share now: $1,200 debit to the seller, $1,200 credit to the buyer.

Trap: for arrears the seller is debited (they used the service but haven't paid). For prepaid items, flip it — the seller is credited for the unused portion they already paid.

Worked example — prepaid rent and mortgage interest

Prepaid rent: A tenant paid $1,500 rent for the full month, and closing is on the 16th of a 30-day month. The seller collected rent for days the buyer will own (days 16–30 = 15 days). Daily rent = $1,500 ÷ 30 = $50; buyer's share = 15 × $50 = $750. Result: $750 credit to the buyer, $750 debit to the seller (the seller passes along rent for the buyer's days).

Mortgage interest (new loan): interest is paid in arrears, so at closing the lender collects prepaid (per-diem) interest from the closing date to month-end. On a $200,000 loan at 6%: daily interest = $200,000 × 6% ÷ 360 = $33.33. For 15 days = $500 debit to the buyer, a single-entry buyer cost.

Putting it together: when a question asks for cash to close, list every buyer debit (price, prepaid interest, the buyer's share of any prepaid tax, recording fees) and every buyer credit (earnest money, the new loan amount, the buyer's share of unpaid taxes), then subtract. Read carefully whether the item is prepaid or in arrears and whether the year is 360 or 365 days — those two choices decide the direction and the size of every proration on the statement.

Closing costs and who pays

Beyond prorations, the statement lists non-recurring closing costs. Typical assignments (subject to contract and local custom):

The transfer tax (or documentary stamp) on the deed is commonly a seller cost but varies widely by location, so the question must tell you. Remember that prepaid items the lender requires at closing — the first year's hazard insurance premium and an initial escrow deposit for taxes and insurance — are buyer debits that increase cash to close but are not prorations. Always separate one-time closing costs from recurring prorated items when you read a statement.